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Hedge Fund Lawsuit – Investors Sue Citigroup for Hedge Fund Fraud

WEST PALM BEACH, Fla.–LAWFUEL – Law Firm Newswire –Citigroup Inc. has been sued in South Florida federal court for fraud for failing to disclose risk in a hedge fund that has lost more than 40 percent of its value in the current credit meltdown.

West Palm Beach trial law firm Babbitt, Johnson, Osborne & Le Clainche, P.A., filed a prospective class action in U.S. District Court in Southern Florida this week, on behalf of all purchasers of the Falcon Strategies Two B LLC Hedge Fund from Sept. 30, 2005, through Jan. 8, 2008.

The suit alleges Citigroup Alternative Investment LLC marketed the fund as low-risk and low-volatility, and then defrauded investors by failing to disclose its change to a far riskier investment strategy. The suit further alleges that the fund’s management did so to increase income from its “exorbitant fees.”

The lead plaintiff, A. Robert Zeff of Boca Raton, Fl., invested the minimum $500,000 in the fund in April 2007. The suit says the fund “was uniformly marketed to all potential investors as an extremely low risk investment that offered low volatility and tax protected distributions.”

In fact, the suit says, Standard & Poors’ had assigned the Fund an S2 volatility rating [on a scale of 1-6, with one representing the lowest risk and six the highest] given its belief that Falcon maintained a low-to-moderate sensitivity to change in market conditions given its stated investment strategy.

On Jan. 8, 2008, Standard & Poor’s changed the rating to a far riskier “S5.” By that time, the suit says, the management had switched to riskier instruments without informing the investors.

“This is a much different product than what was purchased by the Plaintiff, and others similarly situated who purchased the fund prior to Jan. 8, 2008,” the suit says. “At all times, the Defendants were aware and knew high-risk investment and management strategies were being undertaken managing the Fund, but failed to disclose those investment strategies to existing investors and continued to market the fund as a low-risk investment tool for investors.”

Robert Zeff et al. v. Citigroup Alternative Investments LLC, Citigroup, Inc., and Falcon Strategies Two B LLC. U.S. District Court, Southern District of Florida, Case No 08-80346-CIV-Zloch/Snow

The 18-page, four-count suit, filed April 4, accuses the defendants of: fraud; violations of the Florida Blue Sky Law; negligent misrepresentation and violation of the 1933 Securities Act.

In February, Citigroup provided a $500 million line of credit to bail out its Falcon Strategies hedge funds and consolidated the funds’ $10 billion in assets and liabilities on its own balance sheet. It was Citigroup’s second hedge fund bailout in as many months.

Babbitt, Johnson, Osborne & Le Clainche has represented plaintiffs in catastrophic injury cases and complex litigation since 1968. The firm’s website is www.babbitt-johnson.com

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